American Chemical Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

PROBLEM STATEMNT

Dixon needs to decide that whether it should go forward with the acquisition along with the laminate technology or acquire the plant without the laminate technology. If Dixon purchases the plant without the laminate technology it could then sell the plant at the end of either the 5^th or the 10 year. However, if Dixon acquires the plant it could sell the plant at the end of the 10^th year. The free cash flows have been calculated based on the pro forma income statements. Cash flows have been calculated for the 5 year period from 1980 to 1984. This is without the introduction of the laminate technology. After the introduction of the laminate technology, the cash flows have been calculated for the 10 years from 1980 to 1989.

american chemical corporation case solution

ASSUMPTIONS FOR ANALYSIS

The cash flows have beencalculated based on certain assumptions in the second case which is after the introduction of the laminate technology. These assumptions are mentioned in the table below:

ASSUMPTIONS
Given	Sales	Remains same
	Price of NaClO3	Increased by 8% per year
	Power	Remains same
Assumptions (Without Laminate)	Graphite Cost	Increased by 16% per year

	Salt and Other Costs	Increased by 16% per year

	Labor Cost	Increased by 6% per year

	Maintenance Costs	Increased by 6% per year

	Other Costs	Increased by 6% per year

	Selling Charges	Increased by 6% per year

	R&D Costs	Increased by 6% per year

	Depreciation	Constant each year

Assumptions	Graphite Cost	Nil
Assumptions

Based on these assumptions the total cash inflows without the laminate technology are $ 2705 in thousands and after the implementation of the laminate technology, the total cash inflows are $ 41102 in thousands. The cash flows are seen to be facing highs and lows under the first option which is without the laminate technology. However, under the with laminate technology option the cash flows have increased till 1984 but then they started to fall. The complete free cash flow calculation is shown in the appendix below.

ANALYSIS OF BOTH ALTERNATIVES

Dixon is planning to acquire the plant located at Collinsville. The corporate strategy of Dixon focuses on supplying chemicals to the pulp and the paper industry. The products produced by this plant were of a wide variety including aluminumupdate, sulfuric acid, and liquid sulfur dioxide. With the combination of all such chemicals, Dixon could make Sodium Chlorate. This would then support the existing product lines of the company. Dixon was also already doing business with some of those customer’s who were related to the plant’s products. Therefore, in order to acquire and retain those customers, this strategy would work well for Dixon. In this way Dixon could market Sodium Chlorate through its existing sales group.

The discount rate has already been provided to discount the cash flows. Based on the calculated cash flows, the net present value for option 1 which is to invest in the plant without the laminate technology is negative $ 8993 in thousands. However, the net present value of the second option which is to invest in the plant after the implementation of the laminate technology is around $ 12390 in thousands. This clearly shows that Dixon should not go forward with option 1 because it outweighs all the benefits and the net present value is negative. However, if we base the decision only on net present value then Dixon should install the laminate technology at the plant at Collingsville and then run the plant for its useful life of 10 years.

RECOMMENDATION/CONCLUSION

If the management of Dixon agrees to acquire the net assets of Collingsville plant, then it will have all the benefits and all the inflows which are mentioned above. The price quoted by the management of the American Chemical Corporation is $ 12 million. However, the value which has been calculated by discounting the free cash flows of the company is around $ 10.7 million. Therefore, the management of Dixon should install the laminate at the plant located at Collingsville, once this technology is available. Then the management should run the plant for 10 years. However, the management of Dixon should make sure that the cash inflows arising from the new plant with the laminated technology are lower than the offered price. The value is currently at $ 10.7 million based on the free cash flow analysis. Therefore, if the management of the American Chemical Corporation is willing to reduce the price for the plant below $ 10.7 million, then Dixon should go forward and purchase the plant regardless of the fact that the implementation of the laminate technology proves to be successful or not. .................................

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